Moratorium on loan is to defer payment obligations not to waive it off, RBI tells SC

The RBI has told the Supreme Court that its decisions granting a moratorium on loan repayment was only to "defer the payment obligations and it cannot be construed to be a waiver".

The banking regulator declined to grant any "forced" interest waiver on loan moratorium, saying it would risk not only the financial viability of the banks but would also put the interests of the depositors in jeopardy. Further, it would hurt banks by as much as Rs 2 lakh crore (1% of GDP).

"The motivation and intention behind moratorium for installments is the fact that insisting of payment of EMIs during a lockdown will be impractical, and hence it will not be just and fair to impose payment obligations at the same time," it said.

In an affidavit to a PIL by Gajendra Sharma, the banking regulator said that any economic relief has an opportunity cost. The reliefs enjoyed by the borrowers by virtue of moratorium cannot be shifted to the lending institutions and depositors of the country, it said.

It maintained that the circulars of March 27, April 17, and May 23 granting a three-month moratorium period, which now stood extended till August 31, was only to defer the payment obligation. It was not meant to waive off or renounce the repayment.

The circulars were issued with "the objective of mitigating the burden of debt servicing brought about by disruptions on account of Covid-19 pandemic and to ensure the continuity of viable businesses."

The petitioner had asked the top court to declare notifications issued by the RBI as ultra vires to the extent it allowed charging of interest on the loan amount during the moratorium period on EMI repayment. He said the people's income has already shrunk during the period of lockdown due to the Covid-19 pandemic, so the imposition of interest during the loan moratorium will defeat its very purpose and take away its benefit.

In its response, the RBI said, the banks are commercial entities that intermediate between the depositors and the borrowers and are expected to run on viable commercial considerations. Moreover, the banks being custodians of depositors’ money, their actions need to be guided primarily by the protection of depositors’ interests.

"Any borrowing arrangement is a commercial contract between the lender and the borrower and the interest rates reflect the same. The interest on advances forms an important source of income for banks and after meeting the cost of funds, the banks also need to sustain reasonable interest margins for viable operations," it said.